Profit from rising or falling yields

Oftentimes when we think of yields in DeFi, we don’t really consider the impact of changes in the yield on our portfolio. However, what if you could profit when interest rates go up OR down. In this article, we will outline a few ways to measure the impact of falling (or rising) yields on your portfolio.

Duration

Duration measures the sensitivity of your portfolio to changes in yields. It is calculated by taking the partial derivative of the theoretical value of a bond to the yield. However, it is neither here nor there in terms of measuring actual dollar changes to your portfolio for, say a 1% move in yield.

Dollar Value Change

Often we are concerned about the $ dollar value change in our portfolio if a particular yield were to drop by 1% for example. In order to calculate this, we borrow a concept from finance called DV01, which is the dollar value change for 1 basis point (0.01%) in yields. DV01 is just a fancy term to say how much your pnl would move if yields moved up or down by 0.01%. For a 1% move in yields, your pnl would be 100*DV01.

If you are short yields, your DV01 would be negative, and if you are long yields, your DV01 would be positive.

DV01=Notional*Duration

For example. For a $1m bond with 1 year duration, the DV01 of this bond would be $100 and a 1% move in the yield would be $10,000 in pnl.